Software stocks won't rocket soon, analysts say
By Per Jebsen
NEW YORK, May 7 (Reuters) -- Don't count on software stocks resuming their upward march just yet.
Companies such as Microsoft Corp. (NASDAQ:MSFT) and Siebel Systems Inc. (NASDAQ:SEBL) helped lead the tech pack out from its April trough. Now, some money managers worry that software shares have already risen plenty, and that earnings aren't likely soon to rise enough to provide a foundation for higher valuations.
These investors want to see convincing evidence that corporations have begun to spend again on information technology, and reserve their optimism for late 2001 or else 2002 -- barring a general upswing in tech stocks before then.
"I don't think software stocks go straight up from here," said John Faig, an equity analyst with American Express Financial Advisors, which has about $253 billion of assets. Rather, "they go into a wide trading range."
Software stocks began to slide after the dot-com and telecom mania began to dissipate last year and were hurt further this year when software giant Oracle Corp.
Standard & Poor's computer software index , which tracks the computer software companies that are members of the broader Standard & Poor's 500 Index , fell 62 percent from its January, 2000 high to its April 4 low.
Since that low, the software index has risen 37 percent, beating the 14 percent rise in the S&P 500, and slightly outpacing the 32 percent rebound in the tech-laden Nasdaq Composite Index . Microsoft, the world's largest software company, is up 41 percent from a March 21 low while Siebel Systems, a sales and customer service software vendor, has almost doubled from its April 3 close.
ORACLE'S EARNINGS COULD BE CLUE
These hefty gains mean that software stocks "run the risk of being in an overvalued environment again," said Walt Casey, co-manager of the $40 million Banc One Investment Advisors technology fund.
The worry is that software companies, whose share prices began their plunge last year as businesses buffeted by an economic slowdown cut back on technology spending, are not going to muster enough profit to support a further rally until technology spending begins a rebound in earnest.
Investors will look for clues in earnings results scheduled to be reported in mid-June by Oracle, Banc One's Casey said. Those results "may act as a bellwether" for software stocks, he said.
Longer-term, software stocks are poised to benefit once tech spending does pick up, because information technology managers are likely to devote bigger budgets to software over other forms of technology, some argue.
"I think the space is still attractive," said Jeff Huffman, a portfolio manager with Portland, Oregon-based Crabbe Huson Group Inc., which manages about $1.5 billion in stocks and bonds. Crabbe Huson already has a position in Microsoft and Adobe Systems Inc. (NASDAQ:ADBE), and it bought shares of Siebel Systems and Oracle last month, he said.
SIEBEL A LEADER IN CRM
Software is "where the leverage is" for companies, he said. "You've got existing hardware platforms in place. Then the question is, how do you leverage to get the highest return on that investment? It's through software."
Huffman likes Siebel Systems because he considers it the leader in customer relationship management -- or CRM -- software, which allows companies to understand customer buying patterns.
CRM is an area on which companies will focus "when we see companies spending again for tech," he said.
Huffman is a fan of Oracle because he feels that it is the dominant producer of database software.
"IT managers thinking about how to leverage that hardware will think about manipulating the database that they've accumulated," he said. "Oracle provides the software to do that."
Timing the longer-term software rally was a subject in a May 3 note to clients by Goldman Sachs's Rick Sherlund, a top software analyst.
"With stocks already up sharply off their bottoms, investors are understandably apprehensive about these higher valuations without supporting evidence of any improvement in fundamentals," he wrote.
Evidence of improvement should become more apparent by the December quarter of this year. Investors who fear they have already missed the software boat may wish to buy shares during the June earnings preannouncement period, which may push tech stocks back down somewhat, Sherlund wrote.
Sherlund said he favors software stocks on Goldman Sachs' Recommended List: Siebel, Microsoft, BEA Systems Inc. (NASDAQ:BEAS), VERITAS Software Corp. (NASDAQ:VRTS), Internet Security Systems Inc. (NASDAQ:ISSX), Check Point Software Technologies Ltd. (NASDAQ:CHKP), Mercury Interactive Corp. (NASDAQ:MERQ), PeopleSoft Inc. (NASDAQ:PSFT), and Amdocs Ltd. (NYSE:DOX).
Shares of BEA Systems have fallen 20 percent since Friday, when Jim Moore, an analyst with Deutsche Banc Alex Brown, issued a cautious report on the company. Moore said he was concerned that sales by the maker of software for Web sites were slowing.
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